Archive for the ‘Behavior Eco/Fin’ Category

Economics of food buffets…(Could we use some Nudging?)

February 15, 2013

Another brilliant piece by Vandana Vasudevan of Mint. I had commented on her earlier column on Rajdhani Express as well. Such pieces help you think about applying economics at all times..

She points there is something about food buffets. We eat too much in buffets:

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5 Weight Loss Tips From Behavioral Economists..

February 15, 2013

There you go.

Carmen Nobel does a real noble task of summarizing give res papers from beh eco area which provide tips on losing weight.

The tips are:

  • TIP #1 – Order your groceries a week in advance of delivery.
  • TIP #2 – Put your money where your mouth is.
  • TIP #3- Fill your backpack with rocks
  • TIP #4 – Put your hands on your hips a la Wonder Woman.
  • TIP #5 – Ignore your lazy colleagues.

It links the papers as well which lead to these tips. Nice read..

Will economics textbooks change in next 30 years??

February 12, 2013

A depressing at the same time hopeful article by Prof. Barry Eichengreen.

He points that there was a session in recently held World Economic Forum over state of economics textbook. Will it change post crisis? The depressing bit is that most econs feel there is no need for a change. Hope bit is Prof. Eichengreen feels it is due for a change and it will change. Like all technologies change overtime despite pessimistic expectations, same is the case with econ text-book as well.

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Understanding financial crisis via Card Games…Bridge players vs Poker players

January 23, 2013

A terrific paper from Leonardo Becchetti, Maurizio Fiaschetti  and Giancarlo Marini ( Economics dept, University of Rome).

In card games, bridge players are seen as more team-believing and altruistic. In poker games, players are seen as individualistic and selfish. Apparently Akerlof and Shiller in their famed book suggested that there are more poker players these days which has led to current bad practices in financial markets.

The authors evaluate this hypo of  Bridge/ Poker players being more trustworthy/selfish. They find the hypo to be true:

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Nudging to make MDGs more effective..

January 22, 2013

Nice paper by Varun Gauri of WB.

She proposes using the Nudge approach to simplify MDGs. This will make countries adopt them better:

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A Psychological Perspective of Financial Panic

January 14, 2013

Nice paper by Anat Bracha and Elke U. Weber of Boston Fed.

They look at financial panics from a behavioral perspective:

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Changing the nudge on Rajdhani Express..

January 7, 2013

A nice article in Mint on last Friday by Vandana Vasudevan.

She laments her experience in Rajdhani Express (a premium rail service in India for connecting major cities with New Delhi).  She finds the food given in the Express bland and boring:

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30 Years of Prospect Theory in Economics: Mixed experience

December 26, 2012

An amazing paper by Nicbasics holas Barberis of Yale (free version here).

He says despite 390 years and usefulness of Prospect theory, its applications have been limited so far (mostly in finance and insurance). However, things are looking better with some researchers looking at applications in other fields:

Prospect theory, first described in a 1979 paper by Daniel Kahneman and Amos Tversky, is widely viewed as the best available description of how people evaluate risk in experimental settings. While the theory contains many remarkable insights, economists have found it challenging to apply these insights, and it is only recently that there has been real progress in doing so. In this paper, after first reviewing prospect theory and the difficulties inherent in applying it, I discuss some of this recent work. While it is too early to declare this research effort an unqualified success, the rapid progress of the last decade makes me optimistic that at least some of the insights of prospect theory will eventually find a permanent and significant place in mainstream economic analysis.

 Apart from  PT’s applications, paper also explains basics of PT. It has four elements:

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HongKong Monetary Authority and Consumer Protection: Mix of traditional and behavioral approaches

December 17, 2012

Eddie Yue, Deputy Chief Executive of the Hong Kong Monetary Authority gives this speech on consumer protection in financial products.

HKMA has an interesting strategy of consumer protection. It is a mix of classical and behavioral approaches to fin reg:

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Behavioral economics in design of public policy..

December 3, 2012

A comprehensive and must read review on how behavioral economics can help in public policy. It is by Saugato Datta and Sendhil Mullainathan.

It looks at how  behavioral research findings can be made to use economic policy more meaningful and effective:

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How is neuroeconomics faring?

November 20, 2012

Most must have seen it. In case not this is a good read by Josh Fischman on state of neuroeconomics (HT: mankiw’s blog). As you go through the article you can relate neuroeconomics what happened to beh eco when it started..

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Indians are using the lessons of behavioral economics to nudge citizens …

October 29, 2012

An article which gets a huge thumbsup from this blog.

It mentions couple of areas where FinalMile, a firm has used beh eco to nudge citizens into better decisions:

  • Prevent people from crossing railtracks (covered earlier as well). Though I would love to see an empirical study on this experiment to back the claims.
  • Road safety
  • Garbage

Great to know all this and hope to read much more in future..

Tiger Woods and Prospect theory…Do golfers also exhibit loss aversion?

October 22, 2012

An amazing paper by  Devin G. Pope and Maurice E. Schweitzer. Though, it is highly quant based but one does get some ideas.

They look at professional golfers’ behavior across various situations. And findings are in line with Prospect theory (PT). PT says people are risk averse while making gains and risk seekers while making losses. So when golfers are in a winning position they tend to become risk averse and while in a losing position take higher risks:

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Andrei Shleifer’s review of Daniel Kahneman’s Thinking, Fast and Slow

October 18, 2012

Who better than Shleifer to review Kahneman’s tome on psychology and economics.

In this review, I discuss some broad ideas and themes of the book. Although it would be  relatively easy to carry on in the spirit of the first paragraph, constrained only by my limited vocabulary of adjectives, I will seek to accomplish a bit more. First, because the book mentions few economic applications, I will describe some of the economic research that has been substantially influenced by this  work. My feeling is that the most profound influence of KT’s work on economics has been in finance, on  what has now become the field of behavioral finance taught in dozens of undergraduate and graduate  economics programs, as well as at business schools. I learned about KT’s work in the 1980s as a  graduate student, and it influenced my own work in behavioral finance enormously.

Second, I believe that while KT’s work has opened many doors for economic research, some of the fundamental issues it raised remain work in progress. I will thus discuss what Kahneman’s work  suggests for decision theory, primarily as I see it through the lens of my recent work with Nicola  Gennaioli and Pedro Bordalo (Gennaioli and Shleifer 2010, Bordalo, Gennaioli, and Shleifer 2012a,b,c)

He says there are two things he wants to clear two objectives  on beh eco:

The  first objection holds that, while psychological quirks may influence individual decisions at the boundary,  the standard economic model describes first order aspects of human behavior adequately, and  economists should focus on “first order things” rather than quirks. Contrary to this objection, Della Vigna (2010) summarizes a great deal of evidence of large and costly errors people make in important  choices…

The second objection holds that market forces eliminate the influence of psychological factors on prices and allocations. One version of this argument, made forcefully by Milton Friedman (1953) in the  context of financial markets, holds that arbitrage bring prices and therefore resource allocation to efficient levels. Subsequent research has shown, however, that Friedman’s argument – while elegant – is theoretically (and practically) incorrect. Real-world arbitrage is costly and risky, and hence limited  (see, e.g., Grossman and Miller 1988, DeLong et al 1990, Shleifer and Vishny 1997). Dozens of empirical studies confirm that, even in markets with relatively inexpensive arbitrage, identical, or nearly identical, securities trade at different prices. With costlier arbitrage, pricing is even less efficient. 

A second version of the “forces of rationality” objection holds that participants in real markets are specialists invulnerable to psychological quirks. John List’s (2003) finding that professional baseball card  traders do not exhibit the so-called endowment effect is supportive of this objection. The problem with  taking this too far is that individuals make lots of critical decisions – how much to save, how to invest,  what to buy – on their own, without experts. Even when people receive expert help, the incentives of  experts are often to take advantage of psychological biases of their customers. Financial advisors direct savers to expensive, and often inappropriate, products, rather than telling them to invest in index funds (Chalmers and Reuter 2012, Gennaioli et al. 2012). Market forces often work to strengthen, rather than  to eliminate, the influence of psychology.

Great read..

The psychology of shopaholics…

October 16, 2012

Dr. Nutavoot Pongsiri of Bank of Thailand has this nice article on the topic.

He says traditional eco cannot help understand this behavior (Chicago school would disagree). You need help from beh eco and psychology to figure this behavior:

Why do people become shopaholics? We cannot explain this phenomenon using a standard economic framework oriented around efficient allocation and the intersection of the demand and supply curves while ignoring people’s behaviour. Instead, we need to look at behavioural economics and related areas such as behavioural finance and cognitive and emotional factors in understanding the economic decisions of individuals. 

People have different ways of dealing with stress and anxiety. Some turn to food, eating their way through a particularly emotional time. However, research released recently by the University of Pittsburgh Medical School, Carnegie Mellon, Harvard and Stanford universities reveals the effect of depression on compulsive shopping. The researchers explain that part of what’s happening when people are depressed is they become sad and self-focused and that may lead them to go shopping and become shopaholics. Just like a drug addict uses drugs, shopaholics use the excessive shopping as a release when things get to be too difficult to handle.

What is the solution?

Behavioural economics seek to explain the phenomena that can lead to becoming a shopaholic. We, therefore, should avoid shopping when feeling bored or depressed otherwise we will end up buying clothes that we never wear or even cut the tags off. In addition, we need to do shopping mindfully with a wide-angle monetary lens. The truth is that it can be hard to rid ourselves of habitual shopping, especially when credit cards are so easily obtainable. If we carry only cash, our payment is tangible. We will actually have to take the time and count how much we are paying at the counter. But using credit cards may add to the temptation to spend more than we can afford as we do not see the full extent of our expenses. In addition, we always need to remind ourselves to shop for ideas and experience not for fun or for comforting our mood. Last, but not least, shopping with someone with bad spending habits will influence our shopping habits. We should go shopping with a friend who often leaves stores empty-handed. 

:-)

 

Incorporating behavioural economics into intermediate micro…

October 8, 2012

Prof. Frances Woolley again (earlier post here). In a superb post she points how intermediate micro and beh eco are complimentary.

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Linking rational inattention theory with behavioral economics…

October 5, 2012

A superb note from Anton Cheremukhin and Antonella Tutino of Dallas Fed.

They say we should look at rational inattention theory to understand irrational responses:

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T-Mobile lessons in behavioral economics..

October 1, 2012

A superb account by Prof Matt Kahn. How he was tricked into not choosing “opt-out” and instead  remained “opt-in” and paid higher mobile bills.

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How psychology can assist non-car drivers..

September 26, 2012

A superb interview of Prof. Ian Walker, transport psychologist (HT: Thebrowser.com). This blog supports urban initiatives to promote using bicycles for work, travel etc.

However, things are not as easy as this interview suggests. Cyclists are not wanted by either walkers or car people. Town planners never sure where to place them:

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Behavioral economics approaches have greater impact on savings than financial outcomes..

August 17, 2012

It is interesting to read such papers.

Brigitte Madrian of Harvard says that so far we have sued traditional route to increases savings – matching contributions. With behavioral economics we have more tools like text reminders,  simplification, automatic enrollment etc. These latter approaches have a great impact than the traditional approach:

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